Purchasing a Property for Parents

8 Replies

Hello All, 

Happy holidays! I'm hoping you all can help provide some guidance/info on my situation. I'll try to make this as concise as possible. 

I'm looking to buy a property for myself (owner occupant) in the next few months. I've been pre-approved for a loan, so now its a matter of finding a property that can cash flow (looking for a multifamily property where I'd live in one unit and rent the remainder). This would be my first property and I'd be taking advantage of a low down payment. 

An opportunity has recently come up where my parents would like me to buy a property and rent it to them, and they would help me with around 50% of the down payment. I believe they can qualify for their own loan; however, they prefer to have me purchase it so that I can have it as an investment property down the road. I've spoken with a few loan officers/credit unions and it seems that the home for my parents would have to be purchased using an investment loan (20% down). This would be subject to my financing ability, but I'm assuming since i don't have any other debt, an investment property should be do-able.  

Assuming this is something I can/should pursue, I"m trying to make sure I'm considering all avenues so that I'm not left with too much exposure. I'm thinking there are a few avenues that I can take and am wondering what you all would suggest:

1 - I can apply for an investment loan for my parents property and rent it out to them. The only item I am concerned of is that the debt on this would obviously go on my "books" and that would potentially impact me from getting a loan on a primary residence for me in the near future. In addition, I'm worried this might tie up too much money and I might miss out on a deal.

2 - I can co-sign a loan with them, which I think would allow me to refinance the home down the road under my name only, but I think this would leave me with the same concerns as #1 (in terms of qualifying for a primary residence)

3 - I can see if there is a legal way to obtain the property - I'm assuming setting up a living trust or having them sell me the property at some point down the road equal to their cost at the time. 

4 - Let this pass and focus on buying a primary home first.

Any thoughts? 

Thanks in advance! Looking forward to your responses. 

Your in a great position to buy an investment property and since it would be the only property you own for now, you can get a homestead exemption on your taxes. Then rent it out to your parents. Any positive cash flow will help you when you go to get another home for yourself as the cash flow would be considered income. I'm sure there is a time frame that will need to be established in order for your rental income to help you qualify for another loan. I'm not sure on that though. (Anyone else's input would be appreciated). When you go to buy your primary residence, you will no longer get the homestead exception on your rental but you will be locked in to the good rate that was given at the time you purchased it. 

@Jake Landry Thanks for the response! 

I thought the homestead exemption is only relevant if you are trying to get protection from the seizure of your property due to a collection on the debt (like a bankruptcy).  I could be way off (still learning pretty much everything). 

Maybe you are suggesting that i'd be able to deduct the interest for tax purposes? If this is the case, you are right - there is definitely some value added by this. 

I fully agree with you on being able to count the rental income as part of my income for my next property - I think the general consensus is that you'd need 2 years of tax returns with this rental income, even then I think you are only allowed to claim 75% of that rental income as "income" for your next purchase. At least that is what my loan officer has told me.

I see that you are new to the site - welcome! I'm a big fan of spurring conversations on RE and seeing what we can learn from eachother!

hey @Joel G.  I'm pretty new here as well, but having a similar situation here for my in-laws.  We have been tossing it back and forth how best to structure the financing. First - how great are your parents that they want to help you with this?! But I can understand worrying about tying up too much capital. You may want to shop around for different loan programs, especially if it's your first purchase?

As an investment property, does it make sense? Do the numbers work? Are you getting the ROI that you want? As great as it is for your parents to help you out, if the numbers don't work....well, the numbers don't work.

Will your folks be paying fair market value for rent or will they be paying less? If they are paying less, it may count as personal use and counted as a personal home and not an investment property for financing purposes. Although, I'm fuzzy on how that effects taxes/income/write offs/depreciation. Hoping someone else jumps in here. I'm guessing it's not a multifamily? 

Our other worry about renting to family is making sure everything is in writing and clear about who is responsible for what - signing leases etc.  My FIL balked at our list at first, but then he was ok when he realized that it protects him as well. 

 Good luck!

@Ceril S.  It's great to hear there are other people out there with a similar situation! Do you mind sharing with me how you plan to structure your purchase? 

Right it it not being a multifamily (that's what I'm looking for as an owner occupied primary residence) - I never even considered the rent they would be paying - I just assumed if they were going to help with a down payment, they would pay the rent as well as any repairs/maintenance until they no longer needed the house. I'll have to look into renting a house above/below FMV and see how we can structure this.

Great point on listing responsibilities out - the last thing I'd want is for there to be any bad blood over a deal where both sides were trying to help each other out. 

Originally posted by @Joel G. :

@Jake Landry Thanks for the response! 

I thought the homestead exemption is only relevant if you are trying to get protection from the seizure of your property due to a collection on the debt (like a bankruptcy).  I could be way off (still learning pretty much everything). 

Maybe you are suggesting that i'd be able to deduct the interest for tax purposes? If this is the case, you are right - there is definitely some value added by this. 

I fully agree with you on being able to count the rental income as part of my income for my next property - I think the general consensus is that you'd need 2 years of tax returns with this rental income, even then I think you are only allowed to claim 75% of that rental income as "income" for your next purchase. At least that is what my loan officer has told me.

I see that you are new to the site - welcome! I'm a big fan of spurring conversations on RE and seeing what we can learn from eachother!

 Hi Joel,

In the general sense of things you can use 75% of the gross rental income against PITIA of the investment property right away but where the picture gets muddy/grey is whether you and your parents will co sign/co borrow and share title or if you're buying the property solely and you're renting it to them. The underwriter may require 2 years of rental income in this case since its from family so the question is do your parents have the same last name? (implication of parental relationship?)

Secondly if you buy jointly with them and they pay the mortgage for a min of 12 months you can remove this obligation from your debt to income ratios or qualification. The downside is now you both have used up 1 out of 10 of your maximum # of financed properties by Fannie Mae. So do not just take everyone's pro's and con's to heart its good to look at things from a global or 10,000 view approach to make sure it will all work out for your plans.

The same could be said with tax, asset protection, estate planning, and other factors too.

Medium new american funding logo  Albert Bui, New American Funding | [email protected] | 949‑514‑5106 | http://albertbui.com | CA Lender # 345453, WA Lender # 345453, TX Lender # 345453, TN Lender # 345453

@Albert Bui  Thanks for the response - you are right in assuming we have the same last name. I guess I'm trying to figure out the best way for me to structure this. Not quite sure if it would make sense to co-sign a loan just to have me on the home, where I can likely get a similar outcome (have the home upon their passing) if I buy it from them before they pass and/or have it gifted to me. 

Do you see any pros/cons in either of these scenarios? 

Originally posted by @Joel G. :

@Albert Bui Thanks for the response - you are right in assuming we have the same last name. I guess I'm trying to figure out the best way for me to structure this. Not quite sure if it would make sense to co-sign a loan just to have me on the home, where I can likely get a similar outcome (have the home upon their passing) if I buy it from them before they pass and/or have it gifted to me. 

Do you see any pros/cons in either of these scenarios? 

 Regarding the estate and tax planning perspectives I am not an accountant or attorney and not advice, however my take on it is if you're worried about obtaining the property upon their passing you could achieve that with a living trust and have yourself assigned as the beneficiary so you can achieve not only transfer and control of the property but the tax benefits of stepped up basis.

If you were on title as "joint tenants," I don't believe you would have the benefits of stepped up basis (perhaps partial check with tax pro).

Medium new american funding logo  Albert Bui, New American Funding | [email protected] | 949‑514‑5106 | http://albertbui.com | CA Lender # 345453, WA Lender # 345453, TX Lender # 345453, TN Lender # 345453

@Albert Bui  Thanks for the quick response! I hope you have happy holidays :)

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